Let’s Talk Tesla, Bitcoin And ‘Risk Management’

Let’s Talk Tesla, Bitcoin And ‘Risk Management’

I didn’t plan to dwell on this, mostly because it was entirely predictable, but I’d be remiss not to at least mention it. If nothing else, it’s funny.

When Tesla first disclosed its decision to put $1.5 billion in Bitcoin on the balance sheet, I suggested it might be possible to use the position to manage quarterly results — crypto window dressing, if you will.

Sure enough, the company “padded profits” (as Bloomberg put it) in Q1 with Bitcoin sales. “Year over year, positive impacts from volume growth, regulatory credit revenue growth, gross margin improvement driven by further production cost reductions and sale of Bitcoin were mainly offset by a lower ASP, increased SBC, additional supply chain costs, R&D investments and other items,” Tesla said, in the financial summary section of its latest slide deck. Bitcoin sales had a “$101 million positive impact.”

Officially, Tesla beat the Street handily on what we’re calling “the bottom line” these days. Do note that according to at least one bank, 25 cents of adjusted earnings was attributable to regulatory credit sales and Bitcoin trading. That suggests that absent those boosters, Tesla would have missed consensus by around 12 cents. (Maybe “trading” isn’t the right word. If you have a more apt descriptor, feel free to let me know.)

If you listen to the call (I don’t recommend it, honestly, or at least not if you consider yourself a traditional kinda gal or guy), CFO Zachary Kirkhorn described the gain from Bitcoin as “small.”

“We also invested $1.5 billion in Bitcoin during the quarter, then trimmed our position by 10%, which contributed to a small gain in our Q1 financials,” he said, later adding that,

We also allow customers to make vehicle deposits and final vehicle purchases using Bitcoin.

And so where our Bitcoin story began, maybe just to share a little bit of context here. Elon and I were looking for a place to store cash that wasn’t being immediately used, trying to get some level of return on this but also preserve liquidity.

Particularly as we look forward to the launch of Austin and Berlin, and uncertainty that’s happening with semiconductors and port capacity, being able to access that cash very quickly is super important to us right now.

And there aren’t many traditional opportunities to do this or, at least, that we found and in talking to others that we could get good feedback on, particularly with yields being so low and without taking on additional risk or sacrificing liquidity.

And Bitcoin seemed, at the time, and so far has proven to be a good decision, a good place to place some of our cash that’s not immediately being used for daily operations or maybe not needed until the end of the year and be able to get some return on that.

And I think one of the key points that I want to make about our experiences in the digital currency space is that there’s a lot of reasons to be optimistic here. We are certainly watching it very closely at Tesla, watching how the market develops, listening to what our customers are saying.

But thinking about it from a corporate treasury perspective, we have been quite pleased with how much liquidity there is in the Bitcoin market. So our ability to build our first position happened very quickly. When we did the sale later in March, we also were able to execute on that very quickly.

In my opinion (which, last I checked, I’m still entitled to, even when it runs counter to the opinions of folks who build spaceships), some of that assessment from Kirkhorn comes across as a belabored attempt to justify something which is difficult to justify using anything like traditional corporate speak.

To be sure, it’s absolutely true that yields are negligible and any CFO would be derelict not to be concerned about a dearth of available opportunities in that regard.

But Bitcoin, like gold, has no underlying rate of return. It doesn’t pay any interest. It’s not a fixed income instrument. So “return” just means “market gains.” Also, it’s not “cash.” And it’s not a “cash” substitute if you conceptualize of “cash” as something that doesn’t exhibit extraordinary volatility.

The figure (above) seems entirely inconsistent with Kirkhorn’s contention that Bitcoin is somehow a viable solution to the (very real) dearth of “traditional opportunities” to generate return on cash “without taking on additional risk or sacrificing liquidity.”

Risk isn’t always synonymous with volatility, but for what it’s worth, just about the only thing more volatile than Bitcoin is Tesla itself.

It’s not obvious, to me anyway, that Bitcoin is the only (let alone the best) opportunity for the deployment of idle corporate cash. I can’t claim to have ever been a corporate treasurer for an S&P 500 company, but, unlike some of your other “favorite” independent market commentators, I did go to business school. And I can say, with 100% certainty, that there are less volatile options for generating return on cash, where “return” actually means “return,” as opposed to just “market gains.”

Ultimately, Tesla is engaged in Bitcoin trading. I don’t see any way around that. And I’m not sure Tesla is trying to get around it in the first place. Kirkhorn seemed to say that the company entered and (partially) exited pretty quickly. Which is fine. And, as he noted, the decision to get into Bitcoin has been a “good” one “so far.”

But when Kirkhorn suggested, on the same call, that Bitcoin is somehow a superior option when it comes to “global liquidity for the business” and “being able to get cash in and out of the markets,” I have my doubts. Those doubts are even more grave when it comes to the proposition that Bitcoin is appropriate for corporates trying execute from a “risk management” perspective. I can’t imagine anyone, anywhere, teaching that to graduate students destined for careers in corporate America.

Kirkhorn went on to reiterate that Tesla believes “long-term in the value of Bitcoin.”

Somewhat paradoxically, I’d venture that was the least speculative Bitcoin-related statement he made on the call. In part because Tesla’s ongoing support helps ensure Bitcoin’s long-term potential.

15 thoughts on “Let’s Talk Tesla, Bitcoin And ‘Risk Management’

  1. Yep. I like Bitcoin. I like Tesla. I kinda like Musk. He’s a bit of a douche but he’s getting to Mars so, you know…

    But, yep. This was a disingenuous statement and it does raise the fear they’re using btc to manage their quarterly results… my one argument against would be – are they forced to mark to market gains and losses every quarter or do they get to do so only when they realise a sale/unwind a trade? If the former, it’s fine b/c it’s actually likely to create quarterly losses at the wrong time too. If it is the latter…

    1. For what it’s worth, I have absolutely no problem with Musk or Tesla. In my opinion, the only thing he does “wrong” is waste time on Twitter talking about Dogecoin. I don’t need the guy who might get us to Mars wasting his days tweeting. Any time he spends doing anything other than being Tony Stark is a waste of time. That’s a compliment to him, not an insult.

      But, I mean, I can only quote what he says. And what his lieutenants say. And sometimes, they say some stuff that’s — how should I put this? — “ahead of its time.” 🙂

      And when they do that, I’m going to say something about it. It’s not that they’re necessarily “wrong,” but until the rest of humanity catches up, it comes across as potentially risky.

      1. For once, on a Bitcoin related topic, I was 100% in agreement with you… 🙂

        And Elon Musk is less sympathetic than Tony Stark. Tony can be a bit of jerk too but not only is he bringing infinite, pollution free, energy as well as functioning nanotech to his Earth but he’s risking his life to defend it on a regular basis. Somehow, I don’t see Musk being so selfless… 😉

  2. I think it really comes down to where one (for both businesses and individuals) is in one’s life (financially).
    If one is very close to having the passive/dividend income needed to support one’s life, then the last thing one would want to do is be too risky- gamble in Bitcoin and potentially lose it.
    However, if one had already achieved their goal of passive/dividend income- and had some extra money laying around, one might try some Bitcoin. I am not the “Vegas” type, but I still like the adrenaline rush from placing a bet and winning.
    Tesla was either going to gamble on Bitcoin or be faced with yet another capital raise/more debt. So if they lose on Bitcoin, they will just do a capital raise/borrow, as their back up plan.
    What I do not understand is (relatively) young people, who do not have their debt paid off or their long term housing situation figured out (financially) who gamble on Bitcoin. The only thing that I can think of is their mindset- either it seems completely unattainable to achieve their financial goals so “why not”; or it is the invincible feeling that you have in your youth.

  3. Also I would like to mention that Mr. Kirkhorn is no longer called CFO, but “Master of Coin”, so there is that.

    @Emptynester: imho the more prevalent reason for gambling in Bitcoin is your firstmentioned. Riddled with student debt and facing an uncertain labor market, often enough forced to work for minimum wage there are plenty of young people thinking “screw it, I’m going all in, either I win big on bitcoin/gamestop/dogecoin or else it won’t matter anyway”. If your financial goals indeed seem unattainable this kind of thinking is bound to be supercharged.

  4. Which is safer, Tesla or a Swiss bank? Let’s see. Tesla made an extra $100M on imaginary money. Credit Suisse didn’t do as well off of Lex Greensill or Archegos Capital. UBS didn’t do as well off of Archegos Capital.

    Playing with “stuff” (I want to say financial resources but does bitcoin qualify?) comes with risk. Tesla appears better at managing that risk than do some banks. The article sounds like a horse owner yelling at those new fangled automobiles; owning Tesla stock comes with risk and anybody who isn’t willing to accept that (“Musk”) risk should not own Tesla.

    1. I see. Well, since it’s in the S&P, how do you suppose folks go about “not owning Tesla”?

      And if you put your money in the vault at a Swiss bank, the answer to your question is: The Swiss bank.

  5. It certainly doesn’t hurt when you can invest in something then announce that you’ve invested in something, and the announcement drives the price up.
    Is it possible that Musk & Co knew this when they decided to buy??

    1. The theoretical constructs of corporate finance have been broken by the current paradigm. The markets are laughably far from “free”, we lament as much every day. And the opportunity cost of acquisitive growth and real assets are rising by 15% or so a year, especially in the technology sector, by design of the central planners. Now a few brave/bold/reckless/insane (depending on one’s perspective) corporations are rethinking how to manage the debasing cash on their balance sheets. But the textbooks from the analog 20th century say they are only supposed to apply their obvious technological core competencies and competitive advantages to their income and cash flow statements, but not the balance sheet!

      Never mind the rocket science and AI, the pinhead beancounters say you don’t understand the new technology and shouldn’t do it! These companies say the rules are already broken, and nobody has a clue anyway, so why not? The beancounters don’t care if the corporates hold Euros or Yen, and don’t even seem to mind if they lever up all the way into negative tangible book value.

      I am agnostic on Tesla overall, but think these types of moves will be recognized as revolutionary in retrospect. I’d even take the over/under on Apple doing something similar this year with some of their cash hoard. I have worked in corporate finance.

    2. I think what they knew in advance was that rocket fuel stations on Mars take Bitcoin. So when he gets there — and I sincerely hope he does — he can just pop over to the pump and gas up that reusable capsule and fly it back to earth (or not …)

  6. Owning a S&P 500 index fund includes some limited exposure to Tesla. If this is not acceptable to you, then buy individual stocks, small cap growth, large cap value, emerging markets, mid cap blend, etc. Buy VSIIX or VMCIX or IWC or VBK or IJT or whatever.
    As a more serious reply, I think Musk can time and “affect” the crypto market enough that Tesla makes $100M every quarter; I think buying and selling bitcoin will be a “steady” revenue stream for Tesla. I could be completely wrong. I was wrong about Tesla and bitcoin years ago and didn’t jump on those horses when they were cheap; right now, I am on the sidelines watching the show and how Tesla does has a limited effect on me.

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